Big rate hikes are back

December 2022 – big rate hikes are back

Inflation and interest rate hikes remained dominant themes in December, with much of the world continuing to experience persistently high inflation, aggressive interest rate increases, and geopolitical concerns resulting from the conflict in Ukraine. Emerging markets outperformed their developed counterparts, with the MSCI Emerging Markets Index losing 1.6%, compared to the MSCI World Index, which fell 4.3%. After a two-month rise, equity markets began to decline in December.

Fed raises interest rates to highest level in 15 years

The US Federal Reserve (Fed)’s policy committee hiked the federal funds rate (the Fed’s benchmark rate) by 50 basis points (bps) following four straight increases of 75 bps each. The current target range of between 4.25% and 4.5% is the highest since late 2007. According to the Fed, inflation is still high, with recent indicators pointing to modest growth in spending and production, while job gains have been robust in recent months, and the unemployment rate has remained low. The Fed has warned that more rises will be necessary to rein in the rapid pace of price increases.

Central banks react

Six major central banks ‒ those of the Eurozone, Denmark, Switzerland, the UK, Philippines and Mexico ‒ increased their benchmark interest rates in sync with the Fed’s 50 bps hike.

United Kingdom

The Bank of England (BoE) raised the benchmark interest rate by 50 bps to 3.5%, its ninth consecutive rate increase and the highest in 14 years. The decision was not unanimous, with one member of the policy committee voting for a 75 bps increase.

China

China’s economic outlook remains vulnerable as it continues to experience lacklustre growth. The property market is in a slump, manufacturing and production levels are coming in below estimates, and export demand is fading. A rise in Covid infections in China was another factor contributing to risk aversion amid fears of a new Covid wave which may further constrain corporate supply chains.

The impact of rolling power outages in South Africa

Locally, interest rates, rising prices and frequent periods of load shedding remain major concerns. South African manufacturing activity expanded in December, however, business activity deteriorated further in the month due to persistent power cuts. Eskom CEO André de Ruyter resigned in mid-December, marking the 11^th boss to have left the company in just over a decade. De Ruyter’s last day will be 31 March 2023. December also saw the power utility ramping up scheduled power cuts to Stage 6, repeating the worst outage level on record

Global stocks remain outperformer over five years

Global stocks, as measured by the MSCI World Index, delivered the highest returns to SA investors over the five years to 31 December 2022 with a return of 13.11% per annum, on average, in rand terms. In comparison, the FTSE/JSE All Share Index (ALSI) returned 7.98% per annum over the same period. SA bonds delivered 7.85.% per year and cash 5.78%. SA listed property, as measured by the FTSE/JSE SA Listed Property Index (SAPY), is underperforming other asset classes over the long term, contracting 7.24% per annum, on average.

Table 1: Total returns to 31 December 2022

Source: Morningstar | Total returns annualised to 31 December 2022